This invention relates to financial transaction data processing. More particularly, this invention relates to data processing systems and methods for managing the trading of select classes of assets including securities, financial instruments, commodities, and their derivatives in accordance with specific protocols in an auction format with controlled sequences of auction events.
Economic activity has at its centerpiece the buyer-seller transaction for goods and services produced and consumed in a market economy. It is the fundamental mechanism that allocates resources to producers and output to consumers. The operation of the buyer-seller mechanism is often a critical determinant of economic efficiency, and when operated properly, substantially enhances market performance.
Through history, many different approaches have been adopted to bring buyers and sellers together, each with the objective of having transactions occur at or very near the “market” price of goods, satisfying the desires of both buyers and sellers. By definition, the market price is the price that a fully educated market, given full access to that market, will transact select goods. Discovery of the market price can be accomplished by permitting full access to the transaction by substantially all potential buyers and sellers and allowing expression of each party's desires. However, the buyer-seller transaction should be structured to operate at very low costs—or it will distort the market price of goods with artificially high transaction costs. Thus, the two keys to effective buyer/seller transactions—full access coupled with low transaction costs—can be and often are conflicting, necessitating trade-offs between market knowledge and trading efficiency.
One well-known and particularly successful buyer-seller transaction system is known as the “open outcry auction.” Buyers and sellers collect in one location and brokers present prices for select goods to the group via simple vocal offerings. While this approach has been used for almost all kinds of goods, it is particularly useful where there are no established trading locations or markets for the selected items. This approach is the dominant trading forum for exotic items such as rare pieces of art and the like. Although successful in bringing interested parties to the transaction, the overall process can be very expensive, adding significantly to market-distorting transaction costs.
Open outcry auction techniques, modified over time, have also found successful application in many trading activities, including the buying and selling of farm produce and livestock, commodities contracts, futures contracts on various items, and fixed income securities. Many of these trading activities focus on the buying and selling of essentially fungible items; that is, items without meaningful differences from like items on the market. For example, the price of a bushel of wheat for February delivery is usually independent of its source. Similarly, a 30-year U.S. treasury bond paying a coupon rate of 6.75% and having an August 1996 issue date is indistinguishable from an identical bond owned by another investor. Accordingly, the price at which buyers are willing to pay and sellers are willing to accept defines the market price of all 30-year U.S. treasury bonds of that same vintage, allowing open outcry auction trading without regard to an item's source.
(For clarity, the following description focuses mainly on fixed income securities, which should in no way be construed as limiting the scope or applicability of the invention.)
Fixed income securities issued by the United States government are known as U.S. treasuries. These instruments typically span maturities of 13 to 52 weeks (T-bills), one to ten years (notes), and up to 30 years (Bonds). T-Bills are pure discount securities having no coupons. Almost all other treasuries having longer terms are coupon notes or bonds, with defined semi-annual interest payments to the holder. An additional and more recent type of treasury security provides for inflation indexed payments.
New treasury securities are auctioned by the U.S. government at preestablished auction dates. The auction prices for newly issued treasuries having a face value with a set coupon rate defines the treasuries' yields when issued. After the auction, the treasuries enter the secondary market and are traded typically “over the counter” (i.e., without a defined exchange). As inflation expectations and supply and demand conditions change, the prices of recently auctioned treasuries fluctuate on the secondary market. The new prices reflect competing bid and offer prices communicated among institutions, banks, brokers, and dealers in the secondary market.
The newly auctioned securities are traded with securities that issued in earlier auctions. Some securities are traded more often than others and are called the “actives.” The actives usually correspond to the recently issued securities as opposed to the older securities. Indeed, some older securities are infrequently traded, resulting in an illiquid market that may or may not reflect the market-determined interest rate for the more current securities having the same maturity as the older securities.
Accordingly, the very size and diversity of the treasury market requires a high level of sophistication by market participants involved in the bidding, offering, buying, and selling of these securities. The very complexity associated with the transaction and the scale of trading undertaken by banks, brokers, dealers, and institutional participants necessitates a rigidly structured approach to trading.
In the past, open outcry auction bond brokering served its customers well, providing efficient execution at nearly accurate market pricing. The open outcry auction as applied to bond trading was implemented by a broker working with a collection of customers to create and manage a market. Typically, customer representatives—for both buyers and sellers—would congregate at a common location (e.g., a single room) and communicate with each other to develop pricing and confirm transactions. This process involved representatives expressing various bid and offer prices for a fixed income security at select volumes (which are expressed in millions of dollar at given maturities). This expression took the form of a loud oral “cry” of a proposed bid or offer and the coordination with fellow representatives regarding the extraction of complimentary positions until a transaction match was made and a deal done. This “trade capture” process relied on after-the-fact reporting of what just transpired during the oral outcry trade.
Recently, the trade capture process was performed by clerks who input data into electronic input devices. A clerk would interpret the open outcry of many individual brokers simultaneously, who were verbally making known the trading instructions of their customers. The quality of the data capture was a function of the interpretive skill of the clerk and the volume and volatility of customer orders. A significant drawback of this type of auction data capture process is the difficulty in accurately discerning each trading instruction as verbalized in rapid succession during a quickly moving market.
Many permutations of this process are known. In general, because of the lower volumes of transactions occurring at the time of its development, and the lack of suitable alternatives, the open outcry auction process remained the dominant trading mechanism for decades. However successful, this process is not perfect. Indeed, in recent years, some of the problems in an open outcry auction forum have been amplified by the vastly increased level of trading now undertaken in the fixed income field. Generally, difficulties in the open outcry auction process can occur as a result of trader personalities. For example, a loud, highly vocal representative may in fact dominate trading and transaction flow—even though the representative may only represent a smaller and less critical collection of customers. Although such aggressive actions at an open outcry auction may be beneficial to those customers in the short run, overall, such trading dominance can and will likely distort pricing away from the actual market and leave some buyers and sellers unsatisfied.
Other problems exist in open outcry auctions that retard efficient trading. The speed at which trading flows and the oral nature of the auction process create a potential for human error that often translates into many millions of dollars committed to trades unrelated to customer objectives. On some occasions, the broker is left at the end of each trading day with a reconciliation process that may, under certain market conditions, wipe out all associated profit from that day's trading. Also, customers may quickly change trading direction based on new information available to the market. Shifting position or backing out of a previously committed transaction on very short notice is often very difficult in the traditional open outcry process.
There have been many efforts to incorporate computers into trading of select assets and financial instruments, including efforts to automate the auction process through systems that control auction protocols. Indeed, almost all trading today involves some computer support, from simple information delivery to sophisticated trading systems that automate transactions at select criteria. However, these systems have not significantly impacted the issues presented herein relating to satisfaction of buyers' and sellers' complex desires in completing transactions in open outcry auctions and traditional fixed income trading.
In view of the foregoing, it would be desirable to provide apparatus and methods that address the aforementioned problems of certain trading processes involving buyers and sellers.